Pakistan’s tax base has been highly skewed and narrow-based as official data shows that after adjusting for inflation and real GDP, the FBR’s real tax has been standing at 1 per cent from 2016-18 and even deteriorated to -0.3 per cent from 2018-24. The FBR’s real tax per capita has grown by only 0.3 per cent from 2018 to 2024.
Now the FBR has abolished the concept of non-filers because it was misused only for becoming registered into the tax system by filing tax returns when any individual had no other option but to make a transaction to sell or purchase any property or book any vehicle.
Before going into in-depth details, I need to present basic facts as among all peer countries the tax to GDP ratio remained worst in the case of Pakistan. In a five-year period, the tax-to-GDP ratio in India increased from 13.4 per cent of GDP to 18.5 per cent, in Mexico from 9.1 to 16.9 per cent of GDP, Nepal from 8.7 per cent to 17.5 per cent of GDP while in Pakistan the tax to GDP ratio increased from 8 per cent to 10.5 per cent.
The FBR identified a potential tax gap of Rs 7 trillion. The FBR conducted potential income earners and their consumption patterns and found a massive tax gap indicating that the bulk of tax potential lies among underfilers. The top 1 per cent of the wealthy who earned an average of Rs13.2 million, only paid Rs 499 billion but under-filing/null filing caused losses of Rs 1.3 trillion.
Top earners in the quintile of 1 to 5 per cent on average earned Rs 2.7 million and FBR estimated they evaded taxes of Rs 378 billion. Underfilers showed decreased income and paid less taxes than the actual taxable amount.
Among filers, 30 to 40 per cent show an income range of Rs 650,000 per annum. This data shows that most filers were suppressing their actual income so they fell into the category of under-filers.
The cash in circulation has been termed as the biggest flaw for exploiting the real potential of tax compliance in Pakistan as it stood highest among all peer countries standing at 25 per cent whereas it hovered around 14 per cent in India and Bangladesh. It stood at 7 per cent in Malaysia.
Based on GDP growth of 3 per cent, Real Large- large-scale manufacturing (LSM) growth of 3.5%, Inflation rate of 12.9 per cent and real import growth of 16.9 per cent, the FBR conceded in its official presentation given to PM Shehbaz Sharif for achieving the revenue targets of Rs 12970 billion, the FBR will require additional measures beyond policy changes and autonomous growth for the current fiscal year. The FBR has so far faced a revenue shortfall of over Rs 90 billion for the first quarter (July-September) period of the current fiscal year.
Pakistan’s tax-to-GDP ratio could touch the 18 per cent mark similar to India if the tax gap of Rs 7 trillion could be bridged through enforcement and compliance steps.
The FBR is making plans to disallow input on sales to unregistered as well as placement of digital invoicing to track unregistered buyers. The FBR is also asking the power sector high-ups to ensure the transfer of utilities to the actual user’s name by upgrading records on the names of existing owners.
All reforms in the FBR known as the Transformation/Restructuring plan could only be implemented in any part of the world where there was broader consensus on the reform agenda.
